Fewer underwater borrowers, but 'walkaway' risk remains high

Source: Wall Street Journal

The number of Americans whose homes are underwater – meaning they owe more in mortgage debt than the value of the home – is falling, even as home prices continue to fall or remain stagnant in most markets.

Data-provider CoreLogic’s third-quarter negative equity report, released Tuesday morning, shows that the number of homeowners with negative equity fell from 10.9 million to 10.7 million in the third quarter of 2011. If you include homeowners who have less than 5% equity in their homes, 27.1% of all properties with a mortgage are underwater or near to it, CoreLogic says.

The negative equity figure is crucial for two reasons: first, having home equity is a big economic driver because it increases consumer borrowing power and labor mobility, which are important in the early stages of recovery; second, homeowners who are underwater are far more likely to default on their loans and fall into foreclosure than those who are not.

CoreLogic’s report – released on the same day as the latest Standard & Poor’s Case-Shiller indices, which chalked up a 3.9% yearly decline in home values nationally – shows that negative equity is concentrated largely in a few states, the usual suspects of the housing boom: Nevada, Arizona, Florida, Michigan, Georgia and California. New York has the lowest level of negative equity of all 50 states, with only 6.3% of borrowers underwater.

The national level of negative equity has mostly been falling since the fourth quarter of 2009, with a slight blip at the end of 2010, when the level rose, as some homeowners have lost their homes to foreclosure and others have seen prices stabilize in their markets.

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